Key Words

Synopsis

In June 2007, the U.S. Department of the Navy, Naval Air Systems Command (NAVAIR) asked the Bureau of Industry and Security’s (BIS) Office of Technology Evaluation (OTE) to conduct a
defense industrial base assessment of counterfeit electronics. NAVAIR suspected that an increasing number of counterfeit/defective electronics were infiltrating the DoD supply chain
and affecting weapon system reliability. Counterfeits could complicate the Navy’s ability to sustain platforms with extended life-cycles and maintain weapon systems in combat operations.

The purpose of this study is to provide statistics on the extent of the infiltration of counterfeits into U.S. defense and industrial supply chains, to provide an understanding of industry and government practices that contribute to the problem, and to identify best practices and recommendations for handling and preventing counterfeit electronics.

OTE surveyed five segments of the U.S. supply chain – original component manufacturers (OCMs), distributors and brokers, circuit board assemblers, prime contractors and subcontractors, and Department of Defense (DOD) agencies. The objectives of the survey were to assess: levels of suspected/confirmed counterfeit parts; types of devices being counterfeited; practices employed in the procurement and management of electronic parts; recordkeeping and reporting practices; techniques used to detect parts; and best practices employed to control the infiltration of counterfeits.

This assessment focused on discrete electronic components, microcircuits, and circuit board products – key elements of electronic systems that support national security, industrial, and
commercial missions and operations. A total of 387 companies and organizations, representing all five segments of the supply chain, participated in the study covering the 2005 to 2008
reporting period.

OTE data revealed that 39 percent of companies and organizations participating in the survey encountered counterfeit electronics during the four-year period. Moreover, information collected highlighted an increasing number of counterfeit incidents being detected, rising from 3,868 incidents in 2005 to 9,356 incidents in 2008. These counterfeit incidents included multiple versions of DOD qualified parts and components.

The rise of counterfeit parts in the supply chain is exacerbated by demonstrated weaknesses in inventory management, procurement procedures, recordkeeping, reporting practices, inspection and testing protocols, and communication within and across all industry and government organizations.

Based on survey responses, independent research, and field interviews, OTE developed the following general findings:

all elements of the supply chain have been directly impacted by counterfeit electronics;

there is a lack of dialogue between all organizations in the U.S. supply chain;

companies and organizations assume that others in the supply chain are testing parts;

lack of traceability in the supply chain is commonplace;

there is an insufficient chain of accountability within organizations;

recordkeeping on counterfeit incidents by organizations is very limited;

most organizations do not know who to contact in the U.S. Government regarding counterfeit parts;

stricter testing protocols and quality control practices for inventories are required; and

most DOD organizations do not have policies in place to prevent counterfeit parts from infiltrating their supply chain.

To curtail the flow of counterfeit parts into U.S. defense and industrial supply chains, OTE developed key best practices for organizations dealing with electronic components based on
survey respondent recommendations, independent research, and field interviews, including:

provide clear, written guidance to personnel on part procurement, testing, and inventory management;

perform site audits of supplier parts inventory and quality processes where practical;

maintain an internal database of suspected and confirmed counterfeit parts; and

report all suspect and confirmed counterfeit components to federal authorities and industry associations.

In addition, OTE proposes the following recommendations, based on survey responses, interviews, and field visits, which the U.S. Government should institute to inhibit the circulation
of counterfeit electronics:

consider establishing a centralized federal reporting mechanism for collecting information on suspected/confirmed counterfeit parts for use by industry and all federal agencies;

modify Federal Acquisition Regulations (FAR), including Defense Federal Acquisition Regulations (DFAR), to allow for “best value” procurement, as well as require U.S. Government suppliers and federal agencies to systematically report counterfeit electronic parts to the national federal reporting mechanism;

issue clear, unambiguous legal guidance to industry and U.S. federal agencies with respect to civil and criminal liabilities, reporting and handling requirements, and points of contact in the Federal Bureau of Investigation regarding suspected/confirmed counterfeit parts;

establish federal guidance for the destruction, recycling, and/or disposal of electronic systems and parts sold and consumed in the United States;

establish a dialogue with law enforcement agencies on the potential need to increase prosecution of counterfeiters and those entities knowingly distributing counterfeit electronic parts;

consider establishing a government data repository of electronic parts information and for disseminating best practices to limit the infiltration of counterfeits into supply chains;

develop international agreements covering information sharing, supply chain integrity, border inspection of electronic parts shipped to and from their countries, related law enforcement cooperation, and standards for inspecting suspected/confirmed counterfeits; and

address funding and parts acquisition planning issues within DOD and industries associated with the procurement of obsolete parts.

Additional Notes and Highlights

Expertise Required: None (Appendix A contains a glossary of relevant terms which is useful for anyone unfamiliar with electronic components.)